OTTAWA, December 17, 2012 — This statement summarizes the approach taken by the Competition Bureau in its review of two proposed vertical mergers in the pork industry. On October 16, 2012, Olymel L.P. (Olymel) entered into an agreement to acquire Big Sky Farms Inc. (Big Sky), the largest independent hog producer in Western Canada, pursuant to a receivership sale process. On November 1, 2012, Maple Leaf Foods Inc. announced that it had agreed to acquire the Puratone Corporation, the second largest independent hog producer in Western Canada.
The Bureau conducted these reviews separately and in the order that they were filed. The Bureau issued a No Action Letter (NAL) to Olymel on November 27, 2012, and to Maple Leaf on December 6, 2012. A NAL states that the Commissioner of Competition (Commissioner) does not, at this time, intend to make an application under section 92 of the Competition Act in respect of a proposed transaction.1
Consistent with the approach to vertical mergers outlined in the Bureau's Merger Enforcement Guidelines, the Bureau considered whether post-transaction Olymel or Maple Leaf would have the ability and incentive to totally or partially foreclose rivals' access to live hogs in upstream markets (input foreclosure) or to limit or cease their purchases of live hogs from upstream rivals (customer foreclosure), and if so, whether such ability and incentive would likely result in a substantial lessening or prevention of competition in upstream markets or among pork processors for the sale of pork primal cuts in the downstream market.
In both investigations, the Bureau concluded that the mergers were unlikely to lead to a substantial lessening or prevention of competition for a number of reasons, including the inability to create or increase market power upstream due to an excess demand for hogs and the inability to create or increase market power downstream due to, among other factors, effective remaining competition.
The hog breeding and growing operations of Big Sky are located in Saskatchewan and Manitoba, while those of Puratone are located exclusively in Manitoba. Olymel operates a hog processing plant in Alberta, while Maple Leaf operates a plant in each of Alberta and Manitoba. Both Olymel and Maple Leaf supply pork primal cuts throughout Western Canada.
Owing to transportation costs and limits on the time and distance that live hogs can be transported safely, the Bureau determined that the relevant geographic market for the purchase and sale of live hogs was likely limited to the province where the processor or producer, as applicable, was located and the adjacent prairie province(s). It was not necessary for the Bureau to define the relevant downstream geographic market(s) as it was determined that both acquirers would face effective remaining downstream competition under all potential definitions considered.
Through a vertical merger, parties to a transaction may gain the ability to raise rivals' costs by engaging in input foreclosure or customer foreclosure upstream. In both investigations, the Bureau examined the effect of the proposed merger on the upstream markets for live hogs and the downstream market for pork primal cuts by studying the extent to which the merged firm could harm rivals and as a result gain enhanced market power in each of those markets.
Based on information obtained, the Bureau determined that due to the significant presence of Big Sky and Puratone in the upstream markets and the existence of barriers to entry and expansion in Western Canadian hog production, each of Olymel and Maple Leaf would likely have the ability and incentive post-transaction to harm certain rivals by foreclosing access to live hogs (input foreclosure). However, the Bureau concluded that input foreclosure, whether partial or complete, would be unlikely to result in a substantial lessening or prevention of competition because effective competition will remain downstream, including competition between Olymel and Maple Leaf.
The Bureau also determined that post-transaction each of Olymel and Maple Leaf would likely have the ability to harm rivals by foreclosing hog producers' access to a sufficient customer base (customer foreclosure) as both control a significant amount of the slaughter capacity available to hog producers in one or more Western Canadian province. However, the information obtained from the parties and third parties indicated that neither Olymel nor Maple Leaf would have the incentive to foreclose rival hog producers from access to their slaughter facilities since the costs associated with limiting or ceasing the procurement of hogs from upstream rivals would likely exceed the gains from doing so, thereby rendering such a strategy unprofitable. The Bureau therefore concluded that it was unlikely that either transaction would result in a substantial lessening or prevention of competition through customer foreclosure.
Although Big Sky was in receivership and Puratone had filed for protection under the Companies' Creditors Arrangement Act, the Bureau was not required to consider whether either was a failing firm in accordance with section 93 of the Competition Act and the Merger Enforcement Guidelines as a result of the findings of its substantive review.
The Competition Bureau, as an independent law enforcement agency, ensures that Canadian businesses and consumers prosper in a competitive and innovative marketplace.
1 Analytical methodologies are applied, and enforcement decisions are made, on a case-by-case basis. The methodologies and conclusions discussed in this statement are specific to the review of the transaction in question and are not binding on the Commissioner. The legal requirements of section 29 of the Competition Act, and the Bureau's policies and practices regarding the treatment of confidential information, limit the Bureau's ability to disclose information obtained during the course of a merger review. (back to footnote reference 1)
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